Last week, our staff photographer in Mumbai wanted to encash a term deposit that he had opened with a large housing finance company, ahead of its maturity. The firm put its foot down and said he could not do so without a valid reason. On being told that he required the money urgently as his mother would need to undergo a cataract operation, the firm asked him to produce documents to support his claim.
I found it rather strange as, after all, my colleague simply wanted his own money back. I took a close look at the piece of paper that the firm gave him as a proof of his money being kept there and found nowhere was it written that he would need to justify his claim to redeem his money ahead of the maturity period of the term deposit. When I checked this with a Reserve Bank of India executive, I was told that since it’s a bilateral contract between an institution and its customer, the central bank would have nothing to do with it.
An executive of the housing finance firm told me that the form that depositors need to fill while depositing their money with the firm indeed mentions that any claim for such redemptions ahead of maturity of deposits must be supported by proper documents. The executive also mentioned that when interest rates rise, customers often go for a premature withdrawal of such deposits as they want to earn higher rates by buying fresh deposits. Stock brokers also encourage customers to do so as brokers typically get commission when they bring in fresh deposits. Commercial banks too, I am told, are now actively discouraging redemption of term deposits on the same ground—customers are greedy and they want to earn a little more by getting out of old deposits and locking themselves in for new deposits.
But then what do banks do for their loan assets? Don’t they raise the cost of loans when the interest rates rise? There cannot be two sets of rules—one for the banks and another for their customers. One way of offering a level playing field to the deposit holders could be introduction of floating rate deposits, which ensures that the deposit holders earn a little extra in a rising interest rate scenario the way the banks earn on their loans.
Unfortunately, banks in India have not yet started taking their customers seriously. Take the case of savings bank deposits. Theoretically, a customer who keeps her money in savings bank deposit can earn 3.5%. This is much lower than a term deposit and rightly so as this particular facility offers the customers instant liquidity and one can withdraw any amount of money from this deposit without giving any notice to the bank. However, in reality, a savings bank deposit holder earns much less—about 2.7%.
How? This is because interest is paid on the minimum balance one keeps in this deposit after 10th of every month. Who has set this norm that is blatantly against the interest of consumers? Nobody knows; but banks have traditionally been following this and they are not willing to change their ways.
K.J. Udeshi, former Reserve Bank of India deputy governor and now chairperson of the Banking Codes and Standards Board of India, a body that looks after customers’ interests, says that banks must pay interest on the average monthly balance kept in savings bank account and not the minimum balance. But banks have not yet responded to the idea.
The seven-member board, set up in February 2006, meets once a month to take a look at customer-related issues. Except for a few foreign banks that are not present in the retail space, all banks are members of the board.
All of them are required to form a charter of customers’ rights—a code of the bank’s commitment to customers in terms of various services. The code should have been publicly displayed by all banks by 31 March 2007 but only a few have done this so far. Even if all Indian banks do so tomorrow, consumers still can’t heave a sigh of relief as one bank’s customer can still be harassed by another bank. If this sounds like a riddle, read this: the code of bank’s commitment to customer says no customer can be disturbed by phone calls soliciting business in terms of consumer loan, credit card and so on without an implicit consent of the customer. However, this is only a commitment given by one bank to its customers. This essentially means the customer of bank A is spared from the unwanted calls but she will continue to get unsolicited calls from bank B, C and D! The tricky issue can only be addressed when there is a common registry of bank customers.
No wonder complaints filed with banking ombudsmen have been rising. In 2005-06, 15 banking ombudsmen offices across India received 31,732 complaints. That’s three times more than what they received in 2004-05. Between 2001 and 2006, over 61,000 complaints have been registered with the banking ombudsmen.
Typically, the ombudsmen are expected to deal with the complaints taking into account the existing banking laws and practices. They try to resolve the complaints through meetings between the customer and the bank concerned and can even award up to Rs10 lakh in compensation if the process fails. In 2006, ombudsmen in Mumbai, Kanpur, Chennai and New Delhi received the maximum number of complaints. Out of 31,732 complaints received in 2006, more than 20%, or 6,733, related to deposit accounts, 5,215 to loans, 3,052 to delay in cheque collection and 18,357 to other services, including credit cards. And those who think that over-aggressive private and foreign banks take the cake when it comes to shoddy treatment of customers, should know that 60% of the complaints were against our public sector banks.
(Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. He welcomes comments on this weekly column email@example.com.)